Talking Taxes: Rural Counties Seriously Gypped

November 1st, 1997

The nay-saying has started. Opponents of tax cuts have deluged the General Assembly with dire warnings about the consequences of trimming taxes. So let us put Maryland’s fiscal situation in perspective. It is hardly as though Annapolis has been on a diet over our readers’ lifetimes. Adjusted for inflation, state expenditure was $1.7 billion back in 1955. Similarly adjusted, the governor’s budget for fiscal 1998 calls for $14.2 billion. This represents a real increase of 741.62 percent. (All figures in this article are expressed in constant 1994 dollars.) As shown in table 2, in 1955 the state spent $719.56 on each of its citizens. By 1996, this had become $2,810.57 – a leap of 290.60 percent. Naturally, someone had to pay for this largess. In 1955, per capita personal income taxation was just $131.04. In 1998, per-person income tax revenue will be $650.71. (See table 2.)

Let us further set the record straight. Maryland’s lowest income-tax rate is 2.0 percent; its highest, 5.0 percent. Taxes are owed at the lower rate after the first $1,000 of income. At $3,000 of income, the five percent rate kicks in. Currently, only three states initiate taxation at lower income than Maryland: Alabama, $500; Georgia, $750; and Utah, $750. (Another five states initiate taxation at the same level: Idaho, Illinois, Indiana, Missouri and Oklahoma.) And only three states kick in their highest rates at a lower income level: Connecticut, $2,250; Illinois, $2,000; and Indiana, $2,000. (One other state utilizes the same income level, Alaska.) Finally, only 16 states have less generous exemptions than Maryland.

The spend-big brigade counters that, as a proportion of personal income, overall taxation is relatively low. This is only true if local taxation is thrown into the equation. Exclusive of local taxation, state income taxation proportional to income is the third-highest in the country, $39.79 per $1,000 of income next to a U.S. mean of $23.92 per $1,000. Furthermore, such proportionality arguments assume that county-by-county income figures are broadly speaking equal. They most certainly are not. Maryland median household income in 1989 was $45,034, compared to the national average of $35,225. But Maryland’s high figure is only achieved because Montgomery and Howard counties inflate it. Leaving aside these two counties, 1989 median household income in the other 22 political subdivisions was just $38,716.

Table 2 shows that, broken down by county, the per capita state tax burden falls very heavily on a few counties. (The term “county” is inclusive of Baltimore City.) State taxation here refers to all state revenues raised within a given county but excluding state gasoline and titling taxes and corporate taxes accruing to the Transportation Trust Fund. Table 2 shows the Marylandwide per capita state tax burden to be $1,293.08. In seven counties, the figure is higher than this. The counties bearing the brunt of Annapolis’ tax burden are Anne Arundel, Baltimore, Charles, Howard, Montgomery, Talbot and Worcester. This disproportionate burden does not always fall upon the counties that can most afford it. Howard and Montgomery countians pay $1,539.78 and $1,661.46 each, respectively, but perhaps they can afford it. These counties’ household income levels as a proportion of the state average are, respectively, 136 percent and 138 percent. But what of Talbot and Worcester counties? Talbot County’s household income is only 86 percent of the state average, but its residents each pay $1,662.64 in state taxes. In Worcester County, household income is just 73 percent of the Maryland figure, but this county’s long-suffering residents each pay a staggering $1,814.06 in state taxes, the highest rate in the state.

Naturally, there arises the question of how much each county gets back in the way of state grants. After all, a county with a high state tax burden may not be unduly concerned if in return it receives a large amount of state aid. State revenues raised within the counties totaled $6.5 billion in 1994, of which $2.3 billion was distributed back to the counties by way of direct state grants or payments on behalf of counties. Table 2 shows each county’s 1994 state aid expressed in dollars of aid received per $200 of state taxes. Because the average county gets back $100 in aid for every $200 of taxes, these ratios also serve as shorthand for expressing each county’s aid as a percentage of the average county’s aid. In other words, Allegany receives 128 percent of the assistance received by the average county, while Anne Arundel county gets only 58 percent. This is what one might expect: Allegany is poor, while Anne Arundel is wealthy. But here the simplicity ends. In a socialist’s ideal redistributative society, there should be a direct inverse relationship between the amount of state aid a county receives and its median household income. We would expect to find that counties that receive above average state aid (100+ percent) should be the counties with below average income (100- percent). To be sure, this is a crude measure, but it is indicative of a certain element of redistribution. Statistically, the relationship is present, though it is not one to one. The Pearson’s r coefficient of correlation is -.671 (df 22, P < .01). This yields a Pearson’s r2 coefficient of determination of .45, meaning that about half of the variance in state aid to counties may be explained by household income levels.

This is a complex way of saying that, for some counties, the big-spenders’ claim that taxes are not high “as a share of personal income” is a cruel joke. Five counties stand out: Each has below average household income; each receives below average state aid. These are Baltimore, Kent, Queen Anne’s, Talbot, Washington, Wicomico and Worcester counties. To take the most extreme example, Worcester County residents’ household income is 73 percent of the state average, the seventh-lowest in Maryland. They pay $1,814.06 per capita in taxes to Annapolis. In return, they get only 30 percent of the state aid enjoyed by the average county, the equal-lowest rate of return in the state. Don’t think taxes are too high in Maryland? Move to Snow Hill.

Statistical Sources

Harry Bard, Maryland Today: The State, the People, the Government (New York, N.Y.: Oxford Book Company, 1958); David Savageau and Geoffrey Loftus, Places Rated Almanac, 5th ed. (New York, N.Y.: Macmillan Travel, 1997); State of Maryland, General Assembly, Department of Fiscal Services (DFS), The Balance Sheet: A Comparison of State Financial Assistance to State Tax Revenues Allocated to Subdivisions (Annapolis, Md.: DFS, November 1996); DFS, The Fiscal Briefing (Annapolis, Md.: DFS, January 1997); State of Maryland, Office of Planning, Internet World Wide Web site (http://mop.md.gov); U.S. Bureau of the Census, County and City Data Book, 1994: A Statistical Abstract Supplement, 12th ed. (Washington, D.C.: Government Printing Office, August 1994).